Some Investors May Be Worried About Baby Bunting Group's (ASX:BBN) Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Baby Bunting Group (ASX:BBN), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What Is It?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Baby Bunting Group:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.097 = AU$24m ÷ (AU$351m - AU$102m) (Based on the trailing twelve months to December 2023).

So, Baby Bunting Group has an ROCE of 9.7%. Ultimately, that's a low return and it under-performs the Specialty Retail industry average of 18%.

Check out our latest analysis for Baby Bunting Group

Above you can see how the current ROCE for Baby Bunting Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Baby Bunting Group .

What Can We Tell From Baby Bunting Group's ROCE Trend?

On the surface, the trend of ROCE at Baby Bunting Group doesn't inspire confidence. Over the last five years, returns on capital have decreased to 9.7% from 15% five years ago. However it looks like Baby Bunting Group might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

Our Take On Baby Bunting Group's ROCE

In summary, Baby Bunting Group is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And in the last five years, the stock has given away 15% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think Baby Bunting Group has the makings of a multi-bagger.

On a final note, we've found 1 warning sign for Baby Bunting Group that we think you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.